How to Tame your Credit Cards

Generally, credit cards and personal finance don’t mix. There are many reasons:

Credit cards allow you to get into debt.

Credit cards have usurious interest rates.

You’ll spend more with a credit card than with cash.

Credit cards can zing you with fees and interest.

Generally, I would say that handling credit cards is like snakes – eventually they will bite you. And bitten I have been – like about ten years ago when I wrote my regular monthly check to pay off my credit card balance in full, as I did every month, but forgot to write the hundreds amount in the written out line (the amount was correct in the box.) The result was interest charges for that month and the next month (they didn’t make any attempt to contact me about the obvious mistake – they just quietly cashed the check for the lesser amount). This caused interest payments of about forty dollars and my closing the account when they wouldn’t refund the interest.

I have started to dip my foot back into credit after spending several years with just a debit card. Normally I use a debit card that goes with my brokerage account. The beauty of that arrangement, as opposed to using a standard bank debit card, is that the brokerage margin account backs up the debit card. You see, with a regular bank account, if I put too much on the debit card and write too many checks, I can overdraw the account and end up with a lot of returned check fees and mad merchants. This is easy to do with a debit card unless you carry your check register with you and record the debit charges as you go. With the brokerage account backing up the debit card, if I do charge more than the cash in the brokerage account, I just go a little into margin, which charges a fairly low interest rate.

Now I don’t normally live in margin. I generally keep enough to cover my normal monthly charges, plus a couple of thousand dollars extra, in the brokerage account. If I have an extra charge in a month, I may sell some shares off early to raise cash or send money into the account. If I do find that I have gone through all of the cash in the account, which happens maybe once every few years, I can just sell some shares and get out of margin.

About a year ago, I did decide to switch from the standard debit card into a credit card with the brokerage firm. The reason is that the credit card offered cash back rewards. I was skeptical, having been bit before and finding out that the charges when you make a mistake can far exceed the rewards you may be receiving. I reluctantly decided to try the credit card again, however, since the broker offered an automated payment service, where the statement balance for the credit card was automatically sent from the money market account in my brokerage account when the payment was due.

So far this has worked, although there are a few things I didn’t expect that I generally don’t like. Here are some of the issues:

A balance can still build.

The main issue I’ve found is that only the statement amount due is paid automatically at the end of the month, rather than the full balance on the card at that time being paid. This results in about one month’s worth of charges being on the card all of the time since about a month passes between the time that the statement comes and the balance is paid. This reduces the effective amount of credit I have, making me worried about hitting the credit limit on extraordinary months such as when I have a business trip on the card or have made a large purchase. The automated payment also happens late in the month, which further increases the balance on the card before it is paid. There have been a few months where I have been nervously tracking the amount of credit I have left on the card and waiting for the automated payment to be sent. At one point I went ahead and asked for the credit limit to be raised by a few thousand dollars to put the ceiling a little higher, which was granted.

I also discovered this month that I can call in and have a special payment made. I went ahead and paid off the full balance of the card, so it now has almost a zero balance. I will probably go ahead and do this every few months, or if I know that I have some big charges coming up due to a vacation or something, to keep a balance from building up. I also just like to get rid of debts as quickly as I can.

Easy money can lead to over spending.

I do wonder about the effect on our spending from using a credit or even a debit card. We pull out cash each month for what we call “entertainment” – mainly meals out about once a week and personal “blow money” – cash spent however you wish, no questions asked. I do find, however, that there are times when we’re out somewhere and the credit card will get whipped out for a meal or something. This is usually when we need to eat out since we’re out somewhere and can’t make it home for lunch or dinner. It also hurts a lot more to pull out fifty or sixty dollars for a meal than it does to put the same amount on the credit card, so I find there are more meal expenses on the credit cards than I’d like to stick to our budget.

Probably a worse place for overspending due to using a credit card is stores. It is truly amazing how little you can put into your cart nowadays and see a bill of more than $100. Sometimes I’ll go to the grocery store or Wal-Mart, buy just a few things, and walk out with a $60 bill or something. Our debit and credit cards actually also provide a year-end summary of charges, and we found that we spent about 40% of our money in two places – Kroger and Wal-Mart. This is generally groceries and stuff for the home, toiletries, and so on. Still, I wonder if we would have spent as much if we were paying cash. That would be a lot of cash going over the counter each week.

Gift cards that don’t get used.

Generally I trade in the points we earn for gift cards. I found that if I get at least a $50 gift card, we get about 1% cash back from the credit cards for things like restaurants and home improvement stores. So far, however, we haven’t done a good job of using those cards once we get them. They generally sit in the drawer, forgotten about. We really need to do a better job of actually using the cards, perhaps pulling out less cash for meals out on some months since we have the gift cards. We also need to avoid the “Costco effect” – where you eat an entire gallon jar of cherries in a week because you bought a giant jar of cherries since it was such a “great deal.” We need to make sure we use the gift cards to replace spending we would do otherwise, rather than just go out more to use of the gift cards.

So, I’m still not sure about reentering the credit card world. So far things seem to be going all right, but I wouldn’t be surprised to get bit at some point. It definitely distorts our finances since we buy things in one month and then pay for them in the next, making it tough to keep track of spending and to budget. If you have a credit card due in May, but spent the money on things in April, which month do you put it in? You also can’t just look at bank account balances at the end of the month to see how much you are spending. I think we are also spending more than we would with cash.

Thanks to reader, Jessica, who suggested the topic for this post. Keep them coming!

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Published by smallivy

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2 comments

An article that hits home alright! I paid out my cards last month and already dipped back into one for an unexpected purchase. I have however been using a Visa Debit card for years, and my current one from ING Direct provides 2% cash back on ‘pay wave’ purchases under $100. So far this year that’s rebated me $63. I got pretty heavily bit by my AMEX card in January this year after the ‘interest free period’ expired and I didn’t realise that re-payments were paying down the most recent purchase first, not the oldest (which effectively negates the interest free period if the card is used monthly). I’ve since stopped using it for all but utility/insurance charges. Timely piece!

Yeah, all of the credit cards have it in their fine print that they decide where money you pay is applied and they always do what is most beneficial to them – which is paying down the lowest interest rate charges first. You really need to pay them off every month to avoid the shenanigans (not sure I’m old enough to use that word), and even then, they will bite you eventually. Probably the most important thing you can do financially is to build up enough cash to handle unexpected purchases so that you’ll never end up carrying a balance on a credit card. The next most important is putting away money regularly into investments so that you’ll be able to pay for things like new air conditioners and replace cars without taking out a loan. Thanks for reading – hope you’ll be back.

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